Wednesday, May 22, 2024

How and Why to Check the Financial Strength Ratings of a Life Insurance Company

Considering shelling out $10,000 per year to buy a lifetime whole life insurance policy? STOP and do your research first.

How do consumers that are interested in buying Annuities, Cash Value and Term Life Insurance research Insurers?

There are many ways to research American business from the likes of JD Powers, Consumer Reports, and Yelp. However helpful those tools may be they are not really all that useful when dealing with life insurance and annuities. This is because your interactions with an insurance company will be somewhat limited and also because the depth of the individual contracts can’t be reviewed by an online source, its just too helpful.

But where can consumers find useful information about possible future insurance carriers? Really there are two useful places:

Option One -A Financial Strength Rating:

According to Rating Agency, AM Best a Financial Strength Rating is an “opinion” about a given insurers ability to meet claims and other ongoing expenses and obligations.   This opinion, though is a well-versed one. There are three Credit Rating Agencies: Fitch, Moodys, and S&P plus Insurance Rating Specialist AM Best that create Financial Strength Ratings, which are sometimes abbreviated as FSRs and IFSRs.

Financial Strength Ratings are not the exact same as Credit Ratings, as they deal more with outstanding policies in force and less with general bond obligations. The exact specifics though is not fully clear to the public as the rating agencies do not reveal all of their metrics.

What is clear is that all rating agencies that do Financial Strength Ratings or Life Insurance Ratings, as I like to call them) use their own scale. Therefore the scales are not cross comparable. In other words, you can not really look at a Financial Strength Rating for New York Life from AM Best and Compare it with a Financial Strength Rating for Northwestern Mutual from Moodys. What you can do is compare New York Life and Northwestern Mutual with AM Best.  Then later and separately compare NY Life and Northwestern with Moodys.

Financial Strength Ratings are important, and this statement can not be overstated. Given the dearth of public information and knowledge in the insurance landscape, FSRs are really one of the few tools that insurance consumers have to assess the overall health of a given insurer.

FSRs allow consumers to simply compare two carriers using the same grading system. Many of the grading systems such as AM Best use letters combined with pluses and minus. This is somewhat similar to a grading system at school, although not exactly.

What to look for in a Financial Strength Rating, An Opinion:

The higher the better. In general, consumers should probably shoot for at least an A- (A minus) rated carrier and better.  Possibly even just A and above when using AM Best rating scale. For clients seeking a lifetime protection with a product such as Whole or Universal Life, there is a strong argument to made to focus merely on A+ and above. This could also be a good suggestion when seeking some future financial value out of a product such as a case with Annuities.

Option Two- A State Insurance Regulator:

Some states insurance regulators keep detailed information about all of the insurers operating in their state and much of this information may be available, for free, to the public. Although not nearly as likely to be easy to read and understand, nor find, it may be appropriate for life insurance consumers to check with their given regulator and find out what information they have. This can often be the case with more than just life insurance, but also auto, home, and maybe even health insurance.

The State of California even provides consumer based complaint rankings for some types of insurance. Although consumer complaints may not be the best way to assess a complicated contract such as with the case of Whole Life, it can help you focus on where trouble may be brewing.

How to Check a Financial Strength Rating:

Each rating agency has their own tool and platform. Some will require you to create an account and login. Generally speaking, all four rating agencies that produce Financial Strength Ratings will provide ratings for free. AM Best is probably the simplest to use, in my opinion. Just go to and type in the name of the insurance company that you wish to receive a FSR rating on. Caution though! The exact name of the given insurer that you are researching can quickly become of paramount importance. Many corporations have a master and sub corporate entities with often multiple entities in different states. You may need to check with your Insurance Agent about exactly which entity will be writing your future life insurance policy.  The exact wording and spelling is crucial here.

The Life Insurance Rating Endgame:

Rating life insurance companies is a serious and important business.  Consumers should not avoid life insurance ratings, AKA Financial Strength Ratings, because they are too complicated and confusing, but rather they should embrace them as much simpler versions of insurers incredibly complex balance sheets. In the end, an A+ rated company is far more likely to survive a minor financial downturn than a B+ rated company and insurance consumers need to know this before they depend on any insurance carrier.

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